Transcription

1 Challenges for strengthening Mercosul financial integration lessons from the European experience Dr. Claes A. Belfrage School of Management University of Liverpool

2 Acknowledgements, Disclaimers and concessions Thanks! The argument and recommendations of this report are not necessarily representative of BCB or SGT4. And, it certainly isn t representative of the ECB or the European Commission... Europeanist Learning about the Mercosul You are experts on Mercosul, so I will assume more knowledge of Mercosul than European Union

4 Core Argument Overarching Question: What can Mercosul learn from the experience(s) of financial integration in Europe? European Union and Mercosul have long histories and prehistories In both regions, financial integration have shorter histories Yet, financial integration has been positioned at the core of the larger projects of integration (FSAP and LSAP) Both aimed at the creation of regional financial markets through liberalisation However, crudely measured, similarities end there

5 Core Argument Europe approached financial integration enthusiastically and confidently emphasising market-making over market control. Burnt by the debt crisis and a series of finance-related crises in the 1980s and 1990s, and constrained by retained national autonomy, Mercosul was more cautious. While each region was hit by crises around the Millennium (Brazil- 98, Argentina-2001/2 and tech-stock bubble in parts of Europe), only Mercosul seems to have learnt their lessons: 1. Financial markets serve important purposes in the capitalist economy, but they are inherently unstable. 2. They require careful regulation and supervision. 3. Because of their instability, crises will happen despite careful regulation and supervision. The (countercyclical) policy tools have to be in the toolkit to deal with them so that their impact on the real economy is limited.

6 Core Argument In a proper electrical system, there are circuit-breakers and back-up systems. Mercosul had/has those. Europe did not/are trying to construct them. Financial liberalisation in Europe was private-led. In Mercosul, it was publicled. Private-led liberalisation leads to lax regulation/supervision. Outsourcing regulation to private bodies (e.g. Credit rating agencies) is oxymoronic. Market self-regulation is a bad idea. Still, this was not just as a result of purposeful by design, but also as unintended outcome of broader integration process. Europe had undertaken monetary integration (EMU). Mercosul had not. Europe saw it as a great facilitator of integration. Enviously looking at the EU, Mercosul was keen (esp. Brazil), hesitated and could not agree on its design. As intended, the Eurosystem served as a transmission belt for monetary policy. It also, through financial integration (esp. wholesale banking sector), became, albeit clearly not the expected outcome, the transmission belt for build-up of imbalances in the system between core and periphery (artificial interest rates). Free-riding should have been impossible thanks to macroeconomic convergence norms and rules (GSP). These proved inadequate. Even Germany and France broke them. Moral hazard was institutionalised!

7 Core Argument Now, Europe is in a vicious cycle of recurring crises, as there are not enough circuit-breakers: No regional recapitalisation funds No fiscal integration to secure welfare systems No political integration ECB-imposed taboo around countercyclical growth policies (e.g. Europe2020)(inflation and potential credit crisis) Policy-makers, regulators and supervisors play catch-up with the financial markets they have been involved in integrating. Bailouts, bailins and bailiffs : It is a tragic story of Europeans paying for bailouts and now also bail-ins as well as having to endure austerity policies to satisfy illegitimate bailiffs (Troika). A political high-wire act performed without sufficient legitimacy, but the consequences (break-up) are too severe to ponder. Mercosul, despite its successes in containing crisis, faces challenges in financial integration with diverging policy preferences and structural obstacles (Brazil- Argentina, Paraguay and Venezuela).

8

9 Questions Arising Mercosul, with a degree of gleefulness, looks on and learns lessons from the European experience. Yet, are of course also affected by it through reduced demand, tendential overheating and speculative flows of hot money. Will Europe successfully carry out the high wire act? What are the different scenarios imaginable in a break-up? Smaller Eurozone of core economies and economic disaster in the peripheral ones? How can Mercosul financial integration move further given its current stalemate? How much further does Mercosul want to go in liberalising and integrating, however cautiously, regional financial markets? What would be required for a single Mercosul financial market without a common currency to function with minimal systemic risk? Through 10 policy-recommendations, this report points to possible solutions to assure minimal systemic risk and that financial markets serve the public interest of Mercosul.

12 Analytical Framework Direction, purpose and content of policy and regulation ( technical ) Heterodox International Political Economy approach enabling consideration of the interaction of regional processes with global and local contexts States are essential for the construction and sustaining of markets. But, states are neither simple transmission belts of dominant social forces nor a black box of perfect cohesiveness. It is relatively autonomous, pervaded by historical social relations. Policy-making and Regulation/Supervision can be located on continuum from public-led to private-led Processual Complentarity: Financial integration is (in)compatible with other integration processes and overall regional growth strategy Concepts used to understand broader growth strategies: (neo- )liberalisation, Keynesianism and Developmentalism Regulation is a complex term. It is (increasingly) hard to distinguish from supervision. What is its relationship to e.g. liberalisation? Deregulation? All regulatory processes are related to what was before and always involve Este documento the state, não representa therefore necessariamente re-regulation. a opinião do Banco Central do Brasil.

13 Analytical framework Negative and positive integration Against the historical background of focus on microprudential risk analysis, the framework emphasises macroprudential such. Financial fragility and amplification risk (Hyman Minsky) are key in a financial system. Internal (regional/local) and external (insertion into global political economy and international negotiations) dimensions of integration Path-dependent and path-breaking policy

14 Periodisation of financial integration 1. Pre-1998 Financial Integration The European Coal and Steel Community and European Economic Community The Latin American Free Trade Area The European Monetary System and the European Exchange Rate Mechanism The Latin American Integration Association The Single European Act The Treaty of Asuncion (Mercosul), the Montevideo Protocol and fixed exchange rate systems (Convertibility and Real Plans) Maastricht and the European Economic and Monetary Union Crises and Booms

21 Current Situation in European financial integration The wholesale interbank market is quite integrated in that the infrastructure is there, but national barriers remain. Money markets are non-existing Retail market integration is limited Monetary integration is only partial. What is in place is a currency union rather than a monetary union. Banking union is desperately needed here to prevent national ringfencing of liquidity. Big differences in securities and solvency laws remain. Here, there is a lack of common securities law. Moreover, all Giovannini barriers are not removed. Integration in this area is currently at a tipping point of resistance to harmonisation. Bonds and listed derivatives markets are less integrated than equity markets. There has been an opening up of pan-european equity trading, but trading has not meaningfully expanded because there is a lack of harmonisation.

23 Current Situation in Mercosul financial integration Intergovernmental circuit-breakers Willingness to adopt Keynesian-style countercyclical expansionary policy to deal with inevitable crises Lack of monetary integration, but payment system (SML) between Argentina and Brazil (Uruguay negotiations) Strong internal market, partly facilitated by a significant credit expansion... Greater policy autonomy has been created through trade diversification and a reconsideration of internationally dominant policy regimes. This has given the region the freedom to respond in this more effective manner to the crisis. However, limited degree of integration in the region and the historical flexibility towards suspensions of integration agreements is also a cause of tension. 1. Argentina s recent reversion to a more protectionist stance in policy-making, but also Brazil s. 2. Financial integration policy must remain focused on the regulation and supervision of systemic risk despite pressures to deviate from this path. 3. Paraguay suspension and Venezuelan accession are considerable challenges

24 Mercosul financial integration On the short-term horizon Analysis of Mercosul asymmetries on Financial Services concerning National Treatment (NT) and the Market Access (MA). Analysis of obstacles to the progress of effective Financial integration, identification of possible alternatives and resolutions to the identified problems Developing a Technical Cooperation plan in order to foster the financial integration process Constructing a template that addresses the financial regulators requirements to be used in all financial integration processes or financial services negotiations involving Mercosul Writing of a full report on the use of Mercosul currencies on the other Mercosul countries Presentation of a plan for full incorporation of SGT-4 regulations by Venezuela (incl. comparative tables).

25 Conclusion: 10 Policy Recommendations Policy recommendations political and usually stay clear Even when appearing to be technical, they always have consequences benefiting some at the expense of others. (Pareto optimality is rare.) For Mercosul as a whole For individual member states as best practice Typically left imprecise

Os documentos não representam um posicionamento oficial do SGT-4 nem do Banco Central do Brasil. Report on the convenience and risks of currency internationalization and the wider trade of Mercosul Countries

The state of the EU crisis: possible scenarios Johannes Jäger 1 The state of the EU crisis: possible scenarios 1. The crisis at the surface 2. Theoretical perspective: political economy 3. Causes and dynamics

Mario Draghi: Europe and the euro a family affair Keynote speech by Mr Mario Draghi, President of the European Central Bank, at the conference Europe and the euro a family affair, organised by the Bundesverband

Is the Eurocrisisover? Paul De Grauwe London School of Economics Outline of presentation Legacy of the sovereign debt crisis Design failures of Eurozone Redesigning the Eurozone Towards a political union?

Europe s Financial Crisis: The Euro s Flawed Design and the Consequences of Lack of a Government Banker Abstract This paper argues the euro zone requires a government banker that manages the bond market

Keynote Address Roger W. Ferguson, Jr. Understanding Financial Consolidation I t is my pleasure to speak with you today, and I thank Bill McDonough and the Federal Reserve Bank of New York for inviting

Stability in the Eurozone: Challenges and Solutions Ludger Schuknecht Director General Economic and Fiscal Policy Strategy; International Economy and Finance IMFS Working Lunch, Frankfurt (Main), 15 July

Foundation for European Progressive Studies Fondazione Italianieuropei The European Banking and Capital Markets Unions: Challenges and Risks Remarks by Fabio Panetta Deputy Governor of the Bank of Italy

Oversight of payment and settlement systems The efficiency of the financial system depends on the smooth functioning of various payment and settlement systems, because all financial transactions are performed

How to improve financial stability and resilience of systemically important financial institutions after the crisis? EBA Policy Research Workshop How to regulate and resolve systemically important banks

Overcoming the Crisis Klaus Regling, Managing Director, ESM Bank of Greece Athens, 10 July 2014 Reasons for the crisis The crisis was caused by a very specific mix of circumstances: Excessive deficit/debt

Annotated Agenda of the Sherpa meeting 21-11-2013 Main features of Contractual Arrangements and Associated Solidarity Mechanisms At their meeting on 26 November the Sherpas are invited to discuss: General

COMPLETING AND STRENGTHENING THE EMU Italian contribution, May 2015 1. State of play The depth of the economic and financial crisis and its long-lasting impact highlight fundamental unresolved issues related

Masaaki Shirakawa: Insurance companies and the financial system a central bank perspective Keynote address by Mr Masaaki Shirakawa, Governor of the Bank of Japan, at the 18th Annual Conference of the International

The Contribution of Trade in Financial Services to Economic Growth and Development 26 June 2012 Mina Mashayekhi Head Trade Negotiations and Commercial Diplomacy Branch, DITC/UNCTAD Outline 1. Financial

April 2012 STRENGTHENING MACRO AND MICRO-PRUDENTIAL SUPERVISION IN EU CANDIDATES AND POTENTIAL CANDIDATES A programme funded by the European Union Project Summary (not for publication) A programme implemented

Preparing for Next Steps on Better Economic Governance in the Euro Area Analytical Note Jean-Claude Juncker in close cooperation with Donald Tusk, Jeroen Dijsselbloem and Mario Draghi Informal European

List of legislative acts BRRd : d irective 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment

Statement by the Executive Secretary of the Economic Commission for Latin America and the Caribbean, ECLAC, Dr. José Antonio Ocampo, in the name of Regional Commissions of the United Nations It is a great

Lecture 10: International banking The sessions so far have focused on banking in a domestic context. In this lecture we are going to look at the issues which arise from the internationalisation of banking,

FINANCIAL STABILITY ISSUES FOR SMALL STATES Mirko Mallia Assistant Executive Financial Stability Surveillance, Assessment and Data Disclaimer: Any views expressed are only the author s s own and do not

European Parliament 2014-2019 TEXTS ADOPTED Provisional edition P8_TA-PROV(2016)0063 European Central Bank annual report for 2014 European Parliament resolution of 25 February 2016 on the European Central

ISSUES PAPER ON COMPLETING THE ECONOMIC AND MONETARY UNION Introduction The European Council of 29 June 2012 concluded the following: "The report "Towards a Genuine Economic and Monetary Union" presented

Position Paper on the Communication from the European Commission to the European Parliament and the Council on Strengthening the Social Dimension of the Economic and Monetary Union (COM (2013) 690) from

Keynote Speech, EIB/IMF Meeting, 23 October, Brussels Governor Carlos Costa Six years since the onset of the financial crisis in 2008, output levels in the EU are below those observed before the crisis.

Financial Architecture and Banking Systems Financial and Private Sector Development Financial Systems Practice The World Bank Group Our Mission The Financial Architecture and Banking Systems Service Line

European Sovereign Debt Crisis Policy Proposal Presented by the French Republic 9 November 2012 The European Redemption Pact We propose the enactment of the European Redemption Pact, with several amendments.

Jan Pieter Krahnen - Jörg Rocholl Designing the funding side of the Single Resolution Mechanism (SRM): A proposal for a layered scheme with limited joint liability White Paper Series No. 10 Designing the

WELCOME TO THE WEBINAR WEBINAR LINK: HTTP://FRBATL.ADOBECONNECT.COM/ECONOMY/ DIAL-IN NUMBER (MUST USE FOR AUDIO): 855-377-2663 ACCESS CODE: 71032685 Euro Zone s Economic Outlook and What it Means for the

www.pwc.ch/swissfranc Be prepared Four in-depth scenarios for the eurozone and for Introduction The Swiss economy is cooling down and we are currently experiencing unprecedented levels of uncertainty in

Certificate in Social Banking Money and Society Banking Regulation Pros and Cons Professor Dr. Gregor Krämer Chair for Banking, Finance, and Accounting Alanus University of Arts and Social Sciences, Alfter,

Executive Summary In light of the i2010 initiative, the Commission has adopted initiatives to further develop the Single European Information Space a Single Market for the Information Society. However,

The Basel Committee on Banking Supervision: Its Global Role and Current Initiatives United Nation s General Assembly Working Group on the World Financial and Economic Crisis and its Impact on Development

Committee on Payment and Settlement Systems Central bank oversight of payment and settlement systems May 2005 Copies of publications are available from: Bank for International Settlements Press & Communications

21 st ASSIOM FOREX Congress Speech by the Governor of the Bank of Italy Ignazio Visco Milan, 7 February 2015 The positive signs emerging from the global economy are still accompanied by marked uncertainty.

Vítor Constâncio: A European solution for crisis management and bank resolution Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at Sveriges Riksbank and ECB Conference on Bank

New Plan Aims to End European Debt Crisis AP EU heads of state at their summit meeting in Brussels This story comes from VOA Special English, Voice of America's daily news and information service for English

1 Currency and exchange rate regime options 1.1 Introduction In the near future, Icelanders must make important decisions concerning the framework for the currency and monetary policy, the structure of

EUROPEAN COMMISSION Brussels, 13.5.2015 COM(2015) 271 final Recommendation for a COUNCIL RECOMMENDATION on the 2015 National Reform Programme of Portugal and delivering a Council opinion on the 2015 Stability

Interview with Gabriel Bernardino, Chairman of EIOPA, conducted by Fabrizio Aurilia, the Insurance Review (Italy) 1. Since EIOPA was established, how has the role of European supervision of the insurance

A. Introduction 1. Motivation One issue for currency areas such as the European Monetary Union (EMU) is that not necessarily one size fits all, i.e. the interest rate setting of the central bank cannot

Monetary integration Giovanni Di Bartolomeo Sapienza University of Rome The Gold Standard Before World War I, nearly all of the world economy was on the gold standard A government would define a unit of

ACCESS TO FINANCE Improving access to finance is essential to restoring growth and enhancing competitiveness. Investment and innovation are not possible without adequate financing. Difficulties in accessing

Introduction This book discusses the emergence of a multi-polar currency system. The first chapter examines the implications of the creation of the Euro and its role as a global currency in today s multi-polar

Preparation of the Informal Ministerial Meeting of Ministers responsible for Cohesion Policy, Milan 10 October 2014 Cohesion Policy and economic governance: complementing each other Background paper September

UK Response to the Commission Green Paper on Capital Markets Union BUILDING A STRONG CAPITAL MARKETS UNION The UK welcomes the opportunity to respond to this consultation. Creating a Capital Markets Union

GROUP OF TEN REPORT ON CONSOLIDATION IN THE FINANCIAL SECTOR January 2001 The present publication can be obtained through the websites of the BIS, the IMF and the OECD: www.bis.org www.imf.org www.oecd.org

FROM GOVERNMENT DEFICIT TO DEBT: BRIDGING THE GAP Government deficit and debt are the primary focus of fiscal surveillance in the euro area, and reliable data for these key indicators are essential for

FSF Principles for Cross-border Cooperation on Crisis Management 2 April 2009 Preface These high-level principles for cross-border cooperation on crisis management have been developed and endorsed by the

EBF_016371F 4 November 2015 EBF Preliminary views on Banking Union and deposit insurance Background In 2009, the European Commission consulted on the recast of the Deposit Guarantee Schemes Directive (DGSD)

Vice-President Jyrki Katainen Euro changeover conference 25 September 2014, Vilnius Introduction Distinguished Guests, Ladies and Gentlemen, It is a great pleasure to be here in Vilnius today to mark this

A Shared European Policy Strategy for Growth, Jobs, and Stability February 2016 The European project is suffering an unparalleled crisis: the policy reaction to the economic recession and large unemployment

FINANCIALISATION AND EXCHANGE RATE DYNAMICS IN SMALL OPEN ECONOMIES Hamid Raza PhD Student, Economics University of Limerick Ireland Financialisation Financialisation as a broad concept refers to: a) an

Council of the European Union PRESS EN COUNCIL CONCLUSIONS Brussels, 9 December 2014 Council Conclusions on Finance for Growth and the Long-term Financing of the European Economy ECOFIN Council meeting

Stress Tests as a Policy Tool: The European Experience During the Crisis Athanasios Orphanides MIT Frankfurt, 6 June 2014 1 GDP per capita in the US and the euro area 105 105 100 100 Index 2007Q4=100 95